By Tiernan Ray

Shares of Microsoft (MSFT) are up 31 cents, or 0.8%, at $37.66, after Evercore Partners‘s Kirk Materne reiterated an Overweight rating on the shares, and raised his price target to $45 from $40, writing that the shares have upside regardless of whether or not investors’ top choice to succeed Steve Ballmer as CEO, Ford‘s (F) Alan Mulally, actually gets the job.

“Even incremental adjustments to the cost structure and continued growth in the commercial businesses are enough to keep the stock on an upward trajectory given Microsoft’s dividend yield (~3%) and valuation (13x CY15 EPS),” he writes.

“it is clear to us that the majority of investors would like to see Alan Mulally take on the role” of CEO, writes Materne, “with either Tony Bates or Satya Nadella groomed as his ultimate successor,” referring to Microsoft’s executive VP of business development, and its head of cloud computing, respectively.

Even without Mulally, the next CEO will inherit “two significant cloud businesses,” namely “Azure,” the company’s platform-as-a-service computing service, and Office 365, the hosted version of Microsoft Office, he writes. The cloud business could pay off for Microsoft in a big way in emerging markets:

While there has been some modest progress in terms of curbing piracy in emerging markets, we believe by delivering Office as-a-service, MSFT might be able to significantly improve its overall attach rate in these countries. Keep in mind that Google (one of Microsoft’s key competitors in the SaaS-based office productivity space) does not operate in China, so this is a fairly wide open market opportunity. Based on the piracy statistics from BSA above (~15% in China; $9bn out of global total of $63bn), if one were to assume that the ‘attach’ rates in emerging markets for Office against emerging market PC sales improved by 5% – even when discounting the lowest pricing option for Office 365 by 50% - this would result in an incremental revenue opportunity of ~$500m. While this might not seem like a large figure vs. Microsoft’s overall revenue, to the extent Microsoft can lock in emerging market customers on one cloud service, there will be opportunities to upsell them additional services via Azure (SharePoint, Exchange, SQL Server etc.) that could lead togrowing ARPU’s in countries that were historically very challenging to monetize [...] MSFT has been traditionally IP-challenged in China, but we believe the move to cloud services could help Microsoft better monetize its offerings in that region going forward. While largely overlooked by investors, last November 2012, MSFT and 21Vianet Group (the largest and fastest growing carrier-neutral Internet data center services provider in China, as ranked by IDC research) signed a strategic partnership agreement to expand Microsoft’s commercial cloud services – Office 365 and Azure – into China. The two companies launched the public preview for Azure in June 2013 and for Office 365 in August [...] 21Vianet has invested heavily to establish a devoted team and the infrastructure to service the new platform. According to management commentary on its earnings call, the company believes the rollout of a cloud platform with MSFT will add another important pillar to its overall growth, providing meaningful revenue acceleration and margin expansion.

The shift to the cloud means that earnings per share will remain subdued as Microsoft invests in that cloud business, and as it also absorbs the losses of Nokia‘s (NOK) handset business, which it is buying for $7 billion. But over time, cloud computing will reach a stable, ratable subscription revenue stream, he writes. Meantime, the expectations for the consumer side of Microsoft’s business are so low, “if MSFT can simply stabilize spending and see modest success in the consumer market, the upside opportunity outweighs the downside risk.” Most of Microsoft’s profit — 75% to 80% — is from the commercial side, not the consumer, he notes.

“Furthermore, as Microsoft’s commercial business continues to become more ratable, we believe that our valuation assumptions for this business could push higher as this part of the business could call for a multiple more in line with business services companies (mid to high teens) vs. other license/hardware based enterprise technology companies (low-teens).”

Materne offers a revised sum-of-the-parts model, adding “almost any progress on the consumer business could lead to some potential upside in both our EPS and multiple assumptions”:

In contrast to a note earlier this week from Nomura Equity Research‘s Rick Sherlund, arguing for a sale of the Xbox video game console business, Materne believes that even with negative profit margin in hardware, Microsoft has a reason to hold onto this and other hardware offerings:

The Xbox is clearly a key part of Microsoft’s broader strategy of building a presence in the consumers’ living room and we believe the integration between Xbox and other Microsoft services/devices such as Skype and Windows Mobile makes a lot of sense as Microsoft attempts to rebuild some brand recognition among consumers. Given that Xbox is a‘razor/blade’ model for MSFT, we view a strong launch as a positive for the company longer-term, but any economic benefit from the Xbox One will be more of a FY15 event as consumers continue to buy additional games/services for their systems.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.